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ADXAverage Directional Movement (ADX) is a momentum indicator developed by J. Welles Wilder. The ADX measures the extent to which a market is trending. The indicator measures the strength of the trend, regardless of direction; the higher the value, the stronger the trend. The ADX can be used in conjunction with the Direction Indicator (+DI, -DI) to produce a complete trading system. This system consist of three rules: the Crossover Rule, the Extreme Point Rule, and the Turning Point Rule. The Crossover Rule:According to the Crossover Rule, a possible long signal is generated when the +DI crosses above the -DI, and a possible short signal is generated when the -DI crosses above the +DI. The Extreme Point Rule:The Extreme Point is either the high or the low of the bar at which the +DI and -DI lines cross. If it's a bullish crossing (+DI cross above -DI), you should wait for the price to rise above this extreme price (the high price of the bar) on a subsequent bar to possibly enter a long trade. If it's a bearish crossing (+DI crosses below -DI), the extreme point is defined as the low price of the bar at which the lines cross. You would then wait for price to break below this extreme price on a subsequent bar before possibly entering into a short trade. The Turning Point Rule:The Turning Point rule first requires the ADX to be above both the DI lines (+DI and -DI). When the ADX turns lower while in this area, the market often reverses the current trend. This is a warning signal that the market may change direction. According to Wilder, you should stop using any trend following system when the ADX is below both DI lines, as there is no discernable trend.
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